1. Suppose that a paper mill "feeds" a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes increases earnings by $10, the second by $9, the third by $8, and so on, until the tenth unit increases profit by just $1.The cost the upstream mill incurs for producing enough paper (one "unit" of paper) to make one unit of boxes is $3.50.Assume the two mills operate as separate profit centers, and the paper mill sets the price of paper. It follows that the marginal profitability of boxes represents the highest price that the box division would be willing to pay the paper division for boxes.. Furthermore, assume that fixed costs are $0 for the paper mill.The following table summarizes the quantity, total revenue, and marginal costs from the perspective of the paper mill for selling paper to the box mill at various prices.

In the following table, fill in the marginal revenue, total cost, and total profit for the paper mill when selling paper to the box mill at each given price.

Price	Quantity	Total Revenue	Marginal revenue	Total Cost	Marginal Cost	Profit
(Marginal Profitability to the Box Mill)	(Units of Paper equivalent to One Box)	($)	($)	($)	($)	($)
($)
$10	1	$10		$3.50
	$3.50
$9	2	$18
	$3.50
$8	3	$24
	$3.50
$7	4	$28
	$3.50
$6	5	$30
	$3.50
$5	6	$30
	$3.50
$4	7	$28
	$3.50
$3	8	$24
	$3.50
$2	9	$18
	$3.50
$1	10	$10

If the paper mill sets the price of paper to sell to the box mill, it will set a price of and sell units of paper to the box mill. Profits will be____________ for the paper mill. Companywide profits will be_____________

. (Hint: Recall that the prices in the table represent the marginal profitability of each unit of paper, or box, to the box mill.)

Suppose the paper mill is forced to transfer paper to the box mill at marginal cost ($3.50).

In this case, the box mill will demand ____________ units of paper. This leads to companywide profits of_________

A.1

B.2

C.3

D.4

E.5

F.6

G.7

H.8

I.9

K.10

2.Reduction of incentive conflicts between division managers is an advantage of basing incentive compensation of division managers on_____________ profit.

A.divisonal

B. company wide

3.Futura Furniture Products manufactures upscale office furniture for the "Office of the Future." The sales division comprises regionally based sales offices made up of sales representatives and regional managers. Sales representativeswho report to the regional managersconduct direct sales efforts with customers in their regions. As part of the sales process, representatives gather information about likely future orders and convey that information back to the regional managers. Regional managers use that information to create sales forecasts, which are then used as the basis for manufacturing schedules.Sales representatives and regional managers are both compensated on a salary plus commission (percentage of revenue, as pricing is centrally controlled). However, a regional manager's commission is adjusted based on regional sales that exceed the forecast target.Corporate managers are concerned with one of Futura's key products, the "DeskPod." They worry that DeskPod forecasts are inaccurate, causing extreme havoc in the manufacturing process.

True or False: In order to obtain more accurate forecasts, Futura could compensate regional managers based on accuracy of the sales forecasts.

True

False

.